On Tuesday June 30th, we'll be hosting a Black Book call on why we think CHWY is one of the best long ideas in retail today. More specifics to come.
Call Details
Date/Time: Tuesday, June 30th 2020 at 10AM EDT
Toll Free:
Toll:
UK: 0
Confirmation Number: 13705303
Live Video Link: Will be provided prior to call.
Our note from 6/9/20
CHWY | This is Why it’s a Best Idea Long
Takeaway: Years of identifiable customer adds/share gain that is just breaching the path toward profitability. Upside to $85 over a TAIL duration.
Not many places in retail that offer growth investors the kind of growth characteristics you get from CHWY. Pet ownership is on the rise, spending per pet household is increasing, the shift to online within the category is accelerating (in part due to pet Rx share gain), and while Amazon competes in the space, it is not as dominant nor does it have the Brand recognition and consumer’s trust that you have with Chewy. On top of that, there is a massive call option with CHWY to take the model outside the US and add a huge leg to the long-term growth story. As a kicker, it’s covid-proof and added an impressive 1.6mm net new customers this quarter – nearly double the recent quarterly run-rate. The company’s cohort analysis showed that the spending behavior for recently-added customers is at or above levels of existing customers in both basket (+11% higher order size) and frequency – suggesting that this represents a permanent shift in demand.
Financially, the company took a big leap this quarter with its first positive Adj EBITDA in company history – something we weren’t modeling for another year. Unlike models like Wayfair that have to re-acquire every new transaction, Chewy is extremely sticky and spends once to acquire a customer for life. So it doesn’t need to restart the clock toward profitability every quarter, but rather has nearly 15mm customers consistently returning to cumulatively push this model over the profitability goal line. In other words, the company just hit the customer count it needs to generate positive cash flow, and it’s 12-18 months away from a point that will allow it to earn a profit on a GAAP basis. Not to pick on Wayfair, but it will never sustainably earn a red cent. With CHWY, there’s a clear path toward real earnings. The models are often compared as peers, but they couldn’t be more different as it relates to TAM, CAC efficacy, and sustainability of top line growth.
The Street might get bent out of shape given that the company’s guidance assumes a slowdown for the remainder of the year. We’d quickly point out that it is one of the only companies in consumer that is actually giving revenue and profit guidance for the full year – the visibility is simply that stable and positive. It’s worth noting that there was a 1Q ‘pantry stocking’ benefit from existing customers of about $70mm, or about 600bp of the company’s 46% top line growth. While that won’t recur, it’s unlikely to reverse over the next year. Also, full year guidance has costs embedded for a second Covid wave in the fall, which management is planning for – though hopefully the funds will not be needed.
Ultimately, this is a best in class growth model with years of identifiable customer adds that is just breaching the path toward profitability. Is it expensive? It currently has a 3x sales multiple – which is about as high as we can argue with AMZN trading at 3.5x. But the rate of growth alone should carry this stock to $85 over a TAIL duration. Not as juicy a long as it was when the stock was $27, but very defendable upside – especially with 35% of the float held short – in a world where 90% of retailers won’t hit earnings expectations for this year or next. Best Idea Long.
